Slovakia and EFSF Are Not Compatible

The solution of sovereign debt crisis based on redistribution of debts in the form of EFSF proved to be ineffective over the period of last 18 months. The „disease“ continues to spread to other countries and even the catastrophic scenario had come true – the European Central Bank has to help to Italy with its enormous debt. Current situation cannot be considered as a liquidity problem, but the problem of solvency of indebted countries and financial institutions who are their creditors. Solving the „solvency problem“ by increasing the debt with liquidity loans will worsen the situation and endangers other members of eurozone and their access to financial markets (see the case of Italy)

The politicians had not been mandated by the voting public to bring about the fiscal centralization, which follows the debt union.

The suggested solution introduces the unsubstantiated transfers of wealth from taxpayers in one country to the owners and creditors of financial institutions who credited the troubled countries.

Indirect rescue (bailout) of financial sector in the form of EFSF and ECB operations, which is misleadingly interpreted as a rescue of „irresponsible countries“, will lead to growth of nationalistic tensions in the EU and so creates risks for its long-term stability and endangers the existence of the common market with the free movement of goods, people and capital.

The historical experience shows, that the main precondition for long-term stability of monetary union is an existence of a credible commitment not to bail out a member of the union in fiscal troubles from the means of other members. The long term stability of eurozone and the euro currency would contrary to what is believed by the creators of EFSF benefit from the bankruptcy of Greece, which is being prevented by EU leaders at any cost. For this reason saying No to the increase of EFSF does not mean the end of the monetary union.

Slovakia and EFSF

The GDP is not the appropriate indicator to measure the wealth of Slovak population. The share of compensation of employees on GDP and the ability to pay taxes are substantially lower than in other countries of eurozone (with the exception of Estonia). Hypothetically, if the guarantees issued within currently proposed EFSF would be used (total amount EUR 780 bln., share of Slovakia EUR 7.7 bln.), the cost would reach 35% of total general government revenues – the highest number in the eurozone. EUR 1000 of debt would burden Slovak taxpayer twice to three times more than German. To cover potential future costs brought about by membership in the EFSF, we would need to increase the taxes twice as much as the neighboring Austria.

Source: EUROSTAT, chart INESS

Source: EUROSTAT, chart INESS

The solution of the European sovereign debt crisis via EFSF is therefore extremely expensive especially for Slovakia. The proposed increase in EFSF will lower the competitive advantage of Slovakia based in relatively low tax rates compared to other members of EMU, with far more negative consequences in the region of central Europe, where the other governments do not directly take part in EFSF. The inability to keep the low taxes will lead to lower economic growth, and slower catch up of high living standards in the developed countries.

Slovakia already passed costly reforms of social system and Slovaks have paid the bill for extremely expensive recapitalization of Slovak banking sector just ten years ago. The acceptance of costs of bailout of wealthier countries with unreformed social systems and insolvent banking sectors would partly eliminate the positive effects of these painful reforms. By accepting the debts of wealthy and unreformed countries, the Slovak taxpayer had reformed and tightened his belt in vain.